Five VAT Recovery Opportunities Your Accountant Probably Missed
VAT is the tax where the most money falls through the cracks. Partial exemption, capital goods scheme adjustments, option to tax on commercial property, EU VAT recovery under the 13th Directive, and reverse charge errors — each one has a recoverable value that accumulates year after year.
1. Partial exemption de minimis
If your business makes both taxable and exempt supplies, you can only recover VAT on costs attributable to taxable supplies — unless your exempt input tax is below the de minimis threshold. The threshold is £7,500 per year AND less than 50% of total input tax. Many businesses that make small amounts of exempt income (such as interest on deposits, or occasional insurance-related supplies) are incorrectly applying partial exemption calculations when they qualify for full recovery under the de minimis rule. The value: 100% of previously unrecovered input VAT on mixed costs.
2. Capital goods scheme adjustments
If you purchased a commercial property (£250,000+) or a computer/aircraft (£50,000+), the capital goods scheme requires you to adjust the initial VAT recovery over 10 years (property) or 5 years (other items) if the proportion of taxable use changes. Most accountants set the initial recovery percentage and never revisit it. If your taxable use has increased since the acquisition, you are entitled to additional recovery in each adjustment year. The value: up to 10% of the original VAT per year of increased taxable use.
3. Option to tax on commercial property
Opting to tax a commercial property makes rental income and sale proceeds taxable at 20%, but — critically — allows full recovery of VAT on acquisition costs, refurbishment, and ongoing maintenance. The option is irrevocable for 20 years. For property investors holding commercial assets with significant refurbishment costs, the option to tax often recovers more in input VAT than it costs in output VAT on rent. The decision requires modelling both sides. Many accountants default to not opting because it adds complexity. The missed recovery can be substantial.
4. EU VAT recovery (13th Directive)
UK businesses can still reclaim VAT incurred in EU member states on business expenses — hotel stays, conference fees, fuel, car hire — under the 13th Directive refund mechanism. This requires a direct application to each EU member state's tax authority. The process is administrative, not complex, but most UK accountants do not offer it because it falls outside their normal workflow. For businesses with regular EU travel or EU-based suppliers, the recoverable amounts accumulate quickly.
5. Domestic reverse charge errors
The construction industry domestic reverse charge (effective March 2021) requires the recipient of specified construction services to account for VAT rather than the supplier. Errors run in both directions: suppliers charging VAT when the reverse charge applies (creating a cash flow cost to the recipient who cannot reclaim until the next return), and recipients failing to apply the reverse charge (understating their output tax). Both errors are common. A review of the last four VAT periods often identifies corrections that can be made on the next return.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.